|
SAY
WHAAT????
|
|
|
For
more info or to get on our mailing list, contact cpart2@corporate-partnering.com
|
From: Rgeras@aol.com Ron, Maybe I was standing on my head when I was reading the letter Mr. Sahakian wrote to Tom @eprairie and copied you about what he termed the "dirty little secrets" of devious VC firms. I've been an early stage angel investor, entrepreneur, and capital raiser in Chicago for over 35 years and most of what he contends is completely upside down from what I've experienced and doesn't even pass the test of basic common sense. Just a few examples: 1. He makes the statement that "Most VCs avoid like all heck giving a company enough money its first round...to make it through to profitability." And the even more laughable claim that "VCs prefer capital structures in which a company has a burn rate that will force the company back to the VC for more money long before it is able to become economically self sustaining." After being at presentations of dozens of my portfolio companies seeking VC funding just the opposite is true. One of the main concerns that comes up over and over by VCs is whether the company will be able to execute their plan on the amount of money they are seeking...is there enough money to allow for unforeseen contingencies and the inevitable cost overruns, etc. 2. VCs have clauses in their agreements that give them enough control to take necessary corrective action when "things start going bad." Well?? what's wrong with that?? If projections aren't met, if the business plan was flawed, or if current management proves that it isn't up to the job of delivering what they promised, aren't corrective measures called for? After all, the entrepreneur gets investors' money at a certain valuation by convincing them that he's capable of delivering a certain level of performance. If that turns out to be false, shouldn't their be adjustments to compensate for the undelivered value that was promised? Should a proven non-performer just be left alone to continue to run the company into the ground? Who does that benefit? Believe me, that scenario is one of an investor's worst nightmares, not something he schemes to have happen. Most professional investors have dozens of deals in their portfolio and are really mindshare stretched. The last thing they want is to have to spend scarce time doing damage control on troubled deals and to worry about funding unexpected shortfalls in their performance. 3. Now comes the real corker. Mr. Sahakian states that VCs have "provisions in their investment agreements that require founders to spend money only in conformance with a budget...which can be changed only by approval of the board." And concludes from that: "This makes sure that the founders can't throttle back expenditures without getting permission." I'd like to see THAT one! I have never been involved in nor even heard of an instance were an investor was upset because management was bringing in expenses lower than was projected. Nine out of ten companies which run into difficulty do so because they wind up spending MORE money than they projected and have LESS revenues than expected. No investor I know would be upset to discover that management was being careful with the money he invested. 4. Then there are the sinister plots to throw more and more money at underperforming companies for additional dilution. Certainly there are situations where early investors get diluted by unplanned for subsequent rounds, sometimes drastically. I've been on the receiving end of draconian dilution a number of times. However, it often was in situations where the company turned out to need many times the amount of money it originally projected that it would and/or where it's performance was way off expectations. When that happens, there is pain. Why shouldn't the party coming up with cash to give a failed plan another chance get properly rewarded for its risk taking? That's life, and in most cases it is fair considering the circumstances. At least the diluted shareholders are given the opportunity, on someone else's nickel to possibly get some or all of their money out of what would otherwise be a bustout unless they ponied up additional risk money themselves. The bottom line is that I think that Mr. Sahakian is coming to invalid, unwarranted conclusions and making sweeping statements unfairly and carelessly impugning the motives and integrity of what my experience has shown to be a fine group of professionals. Are there some who are less trustworthy than others? Do some greedy and insensitive, inflexible bad apples exist in the investment community? Of course. But we are all human and you can make the same statement about a cross section of any segment of society. This is a small, close knit community built on trust and credibility as much as track record and ability. Reputation means a lot. If anyone acted the way Mr. Sahakian implies most do, it would be very difficult for them to do business for very long. It just wouldn't be worth it even if some were so inclined. So, why is Mr. Sahakian making these statements? Hmmmm...Mr. Sahakian is a lawyer. He starts out encouraging founders and early investors to see if "they probably have the moral and legal right to sue some of their advisors, VC board members and even VC firms." Gee, there wouldn't be some kind of self-serving motive at work here, would there? Nah, not from a lawyer. Perish the thought. Bob Geras |
|||